Billionaire's Times bet: Double or nothing
Carlos Slim's $250 million loan isn't calling the bottom on the beleaguered newspaper; rather, he's wagering on its future existence.
LOS ANGELES (Fortune) -- Let's say that you are the world's richest man (give or take) and are looking for smart places to put some of your hard-earned coin in these tricky times. Clearly, there are no shortage of distressed or at least highly motivated businesses out there. And let's say that one of the candidates is the New York Times Company, whose woes along with the rest of the newspaper industry's have already cost you half of the roughly $120 million investment you put into it last fall as a common shareholder. You might be inclined to play it safe and take a pass a second time around -- but then you wouldn't be Carlos Slim Helu, would you?
Earlier this week, Slim agreed to pump $250 million into the Times under a deal that includes hefty interest payments to him (14%, or at least $26 million a year) and warrants that could ultimately give Slim the option to add 15% of the company's equity to his holdings. Of course, in making such a deal Slim has gained himself much better terms than a mere equity investor, and indeed appears to have driven a hard bargain. It's comparable, in a surface sense, to Warren Buffett's investment in Goldman Sachs. What Slim didn't get -- and to be clear we don't know that he asked for or wanted it because he declined to comment -- was any kind of a seat on the Times board or rights that would diminish the Sulzberger family's controlling grip on the company.
In one sense, that's a curious move because for better or ill, the Sulzberger's stewardship of the paper has not translated the core New York Times' high journalistic success into financial glory over the past few years. According to Barclays Capital, the company should generate free cash flow of $160 million for 2008, shrinking to $102 million in 2010; a far sight from $295 million it generated in 2007 -- let alone the $462 million produced in good old 2000.
What appears shrewd about Slim's investment is that unlike other grandees who have thrown money into the newspaper business, it's not about trying to call the bottom of the newspapers industry's downward spiral this time. Instead, the biggest risk Slim is taking is whether the Times is actually going to stay in business. And despite a lot of recent speculation about whether or how it will be able to pay down some $500 million in debt and bond obligations coming due over the next two years, Slim's investment goes a long way toward addressing it. A spokeswoman said the company also continues to look at taking out a mortgage against its interest in the Times' new midtown headquarters.
Although he has made much of his fortune in telecommunications, Slim himself has shown little interest in the media business until lately. In addition to buying into the Times Company last fall, he also took a 2% stake in Independent News & Media PLC, the Irish based newspaper company that owns the London and Dublin based newspapers of the same name, among others. (Like other newspaper companies, it too has seen its shares diminish over the past few months.) One executive who has discussed newspaper investments with Slim told me that he believes that "great brands will persevere" -- an approach that once led him to rather profitably buy into Apple (AAPL, Fortune 500) during its darker days in the 1990s. Of course, he's also had his duds, like buying retailer CompUSA and Internet access firm Prodigy.
In some ways, though, Slim is an anachronistic investor in the Times. So much of the company's future depends on how it navigates the transition to digital distribution. Despite being a telecom tycoon, Slim has a decidedly old-fashioned way of running his business, delegating authority among his three sons and often keeping industry figures on a folded-up piece of paper in his pocket. He is a master of statistics, especially those involving the New York Yankees. Slim is famously frugal about all aspects of his business, but his family has assembled a multibillion-dollar foundations focused on philanthropy in education and economic development.
Portly and often puffing a cigar, Slim has a business empire reminiscent of John D. Rockefeller's, ranging from phones to finance. The son of a Lebanese immigrant to Mexico, Slim taught math to make money while getting his engineering degree, then started a stock brokerage in Mexico City and began to acquire industrial companies he deemed bargains. When the government put the state-owned telephone company up for sale in the early 1990s, Slim jumped. The terms were controversial: Slim and company got what amounted to a monopoly status, which he has essentially maintained ever since through a masterful neutralization of his opponents.
Slim seems to neither covet the attention nor access that comes with being a media baron, nor to share the controlling Sulzbergers' view that their ownership is a trust that puts the company's journalistic mission ahead of commercial imperative. (That view has been put to the test by the company's battered stock price and a recent cut in the dividend that provided much income for members of the family who control the company via a special class of shares.)
Now, the family also faces the prospect of having the value of its shares diminished even further should Slim end up exercising the warrants he received. In large part because of this potential dilution, Times Company (NYT) shares closed down nearly 8% January 20 on news of Slim's investment. That means there is probably only one happy New York Times shareholder today, and you can guess who that is.